Merchant Agreements

Posted by on Jun 1, 2014 in Blog, Credit Card Processing, Payment Processing | 0 comments

Merchant Agreement / Contract

For our overview video on Taking Credit Card Payments visit this post.

Merchant agreements come in many different varieties, with the most common being an application, agreement and contract all in one. You will find this to be the most used tool in the field as it allows a representative to get all of the necessary information in one visit. Online applications are similar but typically broken up into multiple steps. The important items to look at are the fees attached in the Schedule A (commonly page 2 of an application). The other critical item is to look at the terms including cancellation policy and funding timeframes. Regardless of what the rep says, these are the legal obligations you and your business will be held too.


Three Major Fee Areas
  1. Interchange Fees
  2. Discount Rate / Transaction Fees
  3. Monthly / Support Fees


CostInterchange Fees (Cost)

Interchange fees are commonly referred to as “cost,” because they are the fees that every company in the world pays to process credit cards, even businesses as large and bank card heavy as Wal-Mart and Starbucks. These fees are largely out of the control of the merchant and are dictated by Visa/MasterCard and Discover or American Express.

What the merchant can do to keep these fees low is to processing correctly with up to date equipment and correct procedures. However much of the fee is decided based on factors such as debit vs. credit, card present vs. not and basic bank card vs. rewards card. The interchange fee can range anywhere from 3% of the transaction to less than 0.1% for high ticket retail debit.

Many times the interchange fees are vague or hidden on merchant statements and they are rarely spelled out on merchant agreements. The important point to retain is that interchange fees make up 70% to 90% of total merchant account fees and cost.


Discount Rate / Transaction Fees

The discount rate or margin between interchange and quoted rate along with the various transaction fees is the gross revenue that the processing company makes from a merchant account. It is important to denote this as gross revenue as many companies have buy rates (pricing floors) where profit is only made above these amounts. In addition sales companies and buy rate free organizations or processors have certain costs associated with acquiring and maintaining an account before final profit is calculated.

However the discount rate and transaction fees are where merchants have room to negotiate the total cost of their merchant account. Discount rate can be a little tricky to identify but is typically a percentage anywhere from 0.10% to 1.00% charge to the entire card volume. It is also expressed as a rate such as 1.9% where the margin is the different between the interchange cost and 1.9%. Transaction fees include but are not limited to, authorization fees, batch fee and AVS inquiry.


Monthly Support Fees

Monthly fees are another major area to negotiate on a merchant account. Common monthly fees include the statement fee, service fee, monthly minimum, PCI compliance and gateway fee. Some fees are reasonable and sometimes they can be way out of proportion to the account volume. A lot of it has to do with what software or hardware products that are supported in concert with the account. This can vary widely and thus the monthly fixed fees can fluctuate.

Another commonly misunderstood fee is the monthly minimum which contrary to popular belief is the minimum amount of gross revenue that must be generated. If this amount is not generated, than the difference is charged. A common monthly minimum is $25. Using this common monthly minimum, an example to illustrate this concept is as follows. If an account has an overall margin of 1% and processes $2,000 in a month the gross revenue would be $20. The difference of $5 would be charged to meet the monthly minimum.

Merchant account fees can be tricky. Should you have a specific question, or need some advice please contact us at 866-382-2819 or Contact Us.

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